Sprint to buy Nextel for $35 billion

Deal seen closing in second half of 2005; shares slip

MadeleineAcey

WASHINGTON (CBS.MW) -- Sprint and Nextel Communications said Wednesday that they had agreed to a $35 billion merger that will create the third-largest U.S. wireless phone company, with 40 million customers.

The blockbuster deal comes less than two months after Cingular Wireless closed its $41 billion acquisition of AT&T Wireless to create the No. 1 wireless carrier. Phone companies believe they need greater heft to carve out market share in the intensely competitive wireless market.

Sprint is a big supplier of wireless service to consumers, while Reston, Va.-based Nextel
NXTL
controls a lucrative niche among mobile workers.

The two companies face a big challenge because they operate incompatible networks, but analysts say each needed to get bigger to compete more effectively with industry leaders Cingular and Verizon Wireless.

"Sprint-Nextel is a good deal," said Albert Lin of American Technology Research. "It benefits both companies."

Terms of deal

In a deal structured as a "merger of equals," Nextel's stockholders will receive about 1.28 shares in the combined company as well as 50 cents cash for each of their shares.

That values Nextel stock at $32.63 a share, the companies said. On Wednesday, Nextel shares fell $1.29 at $28.70 and Sprint's stock lost $1.08 to $24.02. Most of the losses occurred late in the trading session.

Pending completion of the deal, the new carrier will be known as Sprint Nextel, and its shares will trade on the New York Stock Exchange. The companies are to get equal representation on the new board.

Forsee has been tapped to serve as CEO of the combined company, while Nextel chief Timothy Donahue is to become chairman of Sprint Nextel. Key officials from both companies are to populate the rest of the executive suite.

Assuming the merger receives regulatory approval -- the companies are targeting completion during the second half of 2005 -- Sprint plans to spin off its local telephone operations to shareholders.

The local business will pay a dividend after it's spun off, but Sprint Nextel will not, the companies said.

Local spin-off

The local-phone segment, which serves 7.7 million access lines, generates $6 billion in annual sales. UBS Warburg has estimated Sprint Nextel could fetch at least $19 billion for that business -- more than half the cost Sprint is paying for Nextel.

In addition, Forsee predicted the combined company could save more than $12 billion through elimination of duplicate assets; migration of customers to one network; and a reduction in sales, marketing and other expenses.

Still, the move to put all the customers of both companies on one network will take time, and it won't be cheap or easy. Forsee said the company would start to "migrate" some customers on Nextel's network, which uses a unique technology called Iden, to Sprint's network in 2006.

By 2008, Sprint aims to offer an improved "push-to-talk" feature on its upgraded wireless network. Yet it may keep the Iden network in operation for customers who require secure push-to-talk service.

"I think the Iden network has a very long life," Donahue said during a press conference Wednesday morning.

How the companies handle push-to-talk, also called "PTT," is crucial. The feature, which enables Nextel's wireless phones to act like walkie-talkies, is a key attraction for Nextel's very loyal customers.

Rivals Sprint and Verizon offer a similar service, but it doesn't work nearly as well technologically on their CDMA-based wireless networks. That's given Nextel a big edge among mobile workers and business customers.

"PTT is a huge product and a loyalty builder for Nextel," said Jane Zweig, chief executive of the wireless research firm Shosteck Group. "The new company will have to make sure that it works very well."

To help ease the network transition, Motorola
MSI, -0.21%
will develop a dual-mode phone that can switch between the Iden network of Nextel and the CDMA network of Sprint, the merging companies said.

Future company

After the merger and the local spinoff, Sprint Nextel would have 55,000 employees, though executives say that number will likely be reduced as duplicate operations are eliminated.

Nearly 80 percent of total revenue, moreover, will come from its wireless business. At the end of September, the two companies had generated a combined $34 billion in sales minus the local operations.

The combined company would have 35 million direct customers and 5 million from partners and affiliates, putting it behind Cingular (47 million) and Verizon Wireless (42 million).

"We look forward to competing with the Verizons and the Cingulars for [pre-eminence] in the wireless and telecom industries," Donahue said.

To that end, Sprint's long-distance wire-line network will play a key role. Sprint Nextel will continue to sell voice, data and other services to large companies, including Nextel's current wireless customers.

The long-distance network will also carry the company's wireless traffic, another area of savings, since Nextel would no longer have to pay a wholesaler to do the same thing.

Potential obstacles

Beyond the technical challenges, the companies will have to navigate a lengthy regulatory approval process, though they expect the deal to close in nine months or less. That's how long it took for the approval of Cingular's purchase of AT&T Wireless.

Regulatory analysts say the merger should be approved without too much difficulty. Still, Michael Powell, chairman of the Federal Communications Commission, say the agency will scrutinize the deal to ensure that enough competition remains in the wireless market.

In addition, rumors persist that Verizon Communications (VZ: news, chart, profile) might yet make a bid for Sprint. Yet analysts say such an offer is unlikely given the high legal and financial hurdles. See full story.

On Tuesday, U.K.-based Vodafone (VOD: news, chart, profile)(UK:VOD: news, chart, profile), which holds a 45 percent stake in Verizon Wireless, denied that it was in talks with Verizon over backing a bid for Sprint.

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